CalPERS panel approves rate hike on split vote

(UPDATE: The full CalPERS board approved the new actuarial method today with no “no” votes and little discussion. Jelincic and Bilbrey abstained.)

A CalPERS committee yesterday approved raising employer rates roughly 50 percent over the next seven years, replacing actuarial methods that kept rates low during the recession with a new goal of full funding in 30 years.

The actuarial method approved by the benefits committee on a 5-to-2 vote, with some labor unions urging a delay for more study, is expected to be approved today by the full CalPERS board.

Board President Rob Feckner wanted to give employers the option of phasing in the five-year rate hike over a longer period, seven to 10 years. Board member J.J. Jelincic wanted to send the proposal to the finance committee for more study.

A motion by board member Henry Jones approved the proposal recommended by the chief actuary, Alan Milligan, but with a one-year delay for beginning the increase for the state and schools until 2015, the same as the start date for local governments.

Over five years, the new method increases employer rates to the level needed to project 100 percent funding in 30 years. Under the old method, plans for the state, local governments and non-teaching school employees are projected to be 79-86 percent funded in 30 years.

Milligan said the total increase from current rates is a little less than 50 percent, depending on how it’s calculated. He said about half of the increase was planned under the old method.

“We expect that the new method would result in contribution rates from 3 to 6 percent (of pay) higher than the current methods would have produced at the end of either the six or seven-year period,” Milligan said.

With the new method, he said, CalPERS is less likely to have a big rate spike after heavy losses, gets to full funding sooner, gives employers predictable rates and better aligns with new government accounting standards.

A strong statement of support for the new method came from Jon Hamm, a Highway Patrol union executive, who said the “first priority” is to ensure that employees receive the pensions promised to them.

“I understand that these are difficult decisions and that they will generate more attention and more pressure possibly for further pension reform or the debate about excessive pension benefits,” Hamm told the CalPERS board.

“I also recognize that by supporting the staff’s recommendation that I am also supporting an increase in my own member’s rates because of the 50-50 split,” he said, referring to the employer-employee “normal” cost share in Gov. Brown’s pension reform.

Hamm said his union has approached the state with a proposal to start paying off the Highway Patrol pension plan‘s “unfunded liability.” He said dealing with the debt “sooner rather than letter” will help build a solid retirement plan.

“I believe the employer is willing to work with us,” said Hamm. “So you have an employer and a labor group that want to send you more money.”

His union negotiated a trendsetting pension increase enacted by SB 400 in 1999 (3 percent of final pay for each year served at age 50) that was widely adopted by local police and firefighters and is now said by critics to be “unsustainable.”

The Highway Patrol union also led a small group of unions that negotiated the first cost-cutting state pension reforms early in 2010, increasing contributions from current employees and giving new hires lower pensions.

Jelincic said he understood the need to end the “rolling” or refinancing of debt and the radical 15-year period for “smoothing” investment gains and losses, with safeguarding “corridor” limits temporarily violated in 2009 to avoid a big employer rate increase after heavy investment losses.

“We keep getting branded as a labor-controlled board,” said Jelincic, a former state worker union leader. “But the movement to narrow or expand the corridors was really driven by the employers.”

Jelincic said he needed more information about several technical points: For example, over 30 years a state worker plan has a 52 percent probability of dropping below a 50 percent funding level and a 51 percent probability of going above 120 percent.

“Given that I really don’t understand the risks, I’m not prepared to vote on this,” he said.

Christy Bouma of California Professional Firefighters, who supported more study, reminded the board that her group opposed an employer rate reduction “when actuaries of a different generation were saying there is so much money we can never spend it all.”

Jelincic also mentioned a CalPERS decision in the late 1990s to give employers a contribution “holiday,” when a soaring stock market during a high-tech boom gave the pension fund a surplus.

As SB 400 gave state workers a generous retroactive pension increase in 1999, CalPERS dropped the state contribution from $1.2 billion in 1997 to near zero for several years. The state contribution this year is $3.8 billion.

A sharp increase in employer rates early in the last decade was cited by former Gov. Arnold Schwarzenegger as he briefly backed a proposal to switch all new state and local government employees to a 401(k)-style individual investment plan.

Avoiding future rate “shocks” is the reason that CalPERS adopted a 15-year “smoothing” period for investment gains and losses, well beyond the three to five years used by most public pensions.

With the five-year increase under the new method, the current employer rate for most state workers, 19.6 percent of pay, would increase to 29.2 percent, schools from 11.4 percent of pay to 18.9 percent, and public agencies from 14.9 percent to 23 percent.

When rates were raised last May mainly to reflect lowering the earnings forecast from 7.75 to 7.5 percent a year, the CalPERS board phased in the small increase — a third in the first year and the rest spread over the following 19 years.

Unions pushing for the rate delay expected the phase-in to make an extra $149 million available for worker pay and other programs this fiscal year. But the Brown administration, which opposed the phase in, paid the full rate, 20.5 percent.

“We believe it’s a matter of pay now or pay more later,” Richard Gillihan of Brown’s finance department told the board yesterday in support of the new actuarial method. “We believe pay now makes better fiscal sense.”

Some experts say that if pension funding levels fall below 40 percent, getting to full funding in the future may require impractical rate increases. The CalPERS board asked staff if pension funds in other states have dropped that far and recovered.

A staff report to the board yesterday said three state retirement systems have fallen below a 40 percent funding level since 2000: Illinois State Employees Retirement System, Kentucky State Employees Retirement System and West Virginia Teachers’ Retirement System.

Milligan said the small sample found during the survey showed that “it was possible to recover, but that benefit changes were very likely to be part of any recovery plan.”

Like most public pension funds, CalPERS was hit hard by the recession. The CalPERS pension fund peaked at $260 billion in 2007, dropped to $160 billion in 2009 and was $257.6 billion after the markets closed Monday.

Voting for the new actuarial method: George Diehr, Feckner, Jones, Grant Boyken for Treasurer Bill Lockyer and Howard Schwartz for Human Resources. Voting “no”: Michael Bilbrey and Terry McGuire for Controller John Chiang. Abstaining: Jelincic. Following custom, the committee chairwoman, Priya Mathur, does not vote unless there is a tie.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 17 Apr 13

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15 Responses to “CalPERS panel approves rate hike on split vote”

I wonder how paying of the pension obligation for PAST employment over 30 years, instead of pushing that debt further into the future could be seen a harsh. That means a 25 year old pregnant woman’s unborn child could be paying for the pension compensation for employment that was competed before she was born when she reaches her mother’s age when she was born.

spension Says: “Sorry, a 29.2% employer contribution is just too much. Our state has many needs that are higher priority.”

Do you have any idea how many local governments already pay significantly more than 29 percent? There’s no shortage of cities already paying above 40 percent of payroll. Hopefully the increased rates will convince more people that REAL pension reform is still needed, and make it more difficult for city governments to pretend the problem doesn’t exist.

While I applaud this move by CalPERS, they still have much to do in the way of putting their house in order. They could start by eliminating many of the “Optional Benefits” that are unnecessary, unfair, and helped create many of the problems in the first place (i.e. 3@50, 3@55, 3@60, “Highest One Year Pay, Employer Pension Pick-U, etc, etc, etc…).

I certainly hope cities start their planning during the current budget cycle, and before approving anymore employee contracts.

“spension Says: Captain, can you provide any link to 40% for non-safety? For safety I’ve seen near 40%”

No, spension. I can show you a city that pays over 30% for non safety in retirement benefits. I can show you many cities that pay over 40%, currently, even before the 50% increase for public safety. And I can show you some cities that pay over 50% in public safety contribution rates. In case you’re unaware, just because CalPERS doesn’t show 40% plus Safety contributions doesn’t mean they aren’t there (currently). When cities also pay the employer pick-up (usually the full 9% of the employee contribution), that doesn’t show up in the CalPERS numbers. If you look at a CalPERS actuarial report the report says employer pick-ups are not included.

To determine if a city is paying the employee portion of the contribution rate, on top of the employer contribution rate, you actually have to look at the bargaining units MOU. I can assure you we have many Public safety bargaining units receiving 40-50% contribution rates currently, with some already over 50%.

What seems to get lost in the pension formula analysis/contribution rate argument, is the acceleration of the base wage and added perks that actually represent the unsustainable foundation of the pension plans. I think CalPERS has claimed that 25% of the unfunded liability is attributed to the acceleration of wages and/or what’s classified as pensionable income.

Just a quick example, in Vallejo a PD Captain earns 200k per year (before overtime). The pension cost for that employee is over 88K (44.1%).

Here are the Vallejo rates, from CalPERS, for the following years (before the 50% increase)

– again, these numbers are from the CalPERS actuarial reports that can be found on the CalPERS website, and the do NOT include the projected 50% rate increase. As you can see, even if the captain wage doesn’t increase over the next several years, the pension cost will increase from 88k in the current year to 106K in 2015-16 (and, again, that doesn’t include the 50% pension rate hike CalPERS just approved).

BTW, Spension, I consider that an astronomical number for a PD Captain that receives 5 weeks vacation, 16 paid holidays – which can be converted to compensation to boost the pension, and as many as 180 paid sick hours per year – which can be converted into service credit. It’s all in the contract/MOU.

James, your comments do not make sense to me. I’m unaware of any CalPERS entity requiring employees to pay a 12.3% contribution rate on top of their own employee contribution rate. There is a difference between paying 12.3% of payroll and paying 12.3% of the employer contribution. What does “SO” mean? Why is this person only paying 7 percent of payroll?

Again, your numbers do not make sense. I hope you can expand on your previous comments.

My understanding is it requires the employee to “cost-share” the employer’s CalPERS contribution. So if the base salary is, for example, $100k, $7k will be withheld as “employee contribution”, and $12.3k will be withheld for “employer contribution” cost-sharing. The real pay in the end is $80.7k before other taxes.

I do NOT agree with this statement: “The real pay in the end is $80.7k before other taxes.” The 7% employee contribution rate isn’t a tax but a form of deferred compensation – with a substantial 7.5% guaranteed rate of return and also 2% COLA’s. Try getting your investment advisor to promise you that. I’m guessing the 12.3% is to help fund the unfunded liability of the current employees – which may or may not benefit your Significant Other.

Not sure how the 12.3% additional contribution is structured. Maybe it’s an “employer pickup” negotiated between the city and bargaining unit. If so it is very rare, at least for the time being, and I can only think of one city that has pursued this level of employee contributions. I also think it’s fair.

What city are you referring to? I would like to see what they’ve done so I can make sense of it.

“spension Says: Captain, can you provide any link to 40% for non-safety? For safety I’ve seen near 40%”

No, spension (repeated). Spension, I answered your question the first time. I’m curious as to why you think this distinction is so important? Just because miscelaaneous employees aren’t already costing 40% of payroll doesn’t mean the cost hasn’t increased at the same rate as Public Safety

One is no better than the other. The cost for each is choking taxpayers and services.